Zero-debt allows substantial financial flexibility, especially for small-cap companies like Adverum Biotechnologies Inc (NASDAQ:ADVM), as the company does not have to adhere to strict debt covenants. However, it also faces higher cost of capital given interest cost is generally lower than equity. While ADVM has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess ADVM’s financial health. Check out our latest analysis for Adverum Biotechnologies
Is ADVM growing fast enough to value financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. The lack of debt on ADVM’s balance sheet may be because it does not have access to cheap capital, or it may believe this trade-off is not worth it. Choosing financial flexibility over capital returns make sense if ADVM is a high-growth company. Opposite to the high growth we were expecting, ADVM’s negative revenue growth of -27.24% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Does ADVM’s liquid assets cover its short-term commitments?
What about its other commitments such as payments to suppliers and salaries to its employees? During times of unfavourable events, ADVM could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that ADVM does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Are you a shareholder? ADVM’s soft top-line growth means not having any low-cost debt funding may not be optimal for the business. Shareholders should understand why the company isn’t opting for cheaper cost of capital to fund future growth, and whether the company needs financial flexibility at this point in time. You should take a look into a future growth analysis to examine what the market expects for the company moving forward.
Are you a potential investor? The company’s current holding of liquid assets gives it some level of security in any case of adverse events. But, a relatively low revenue growth could hurt returns, meaning there is some benefit to looking at low-cost funding alternatives. This is only a rough assessment of financial health, and I’m sure ADVM has company-specific issues impacting its capital structure decisions. You should continue your analysis by taking a look at ADVM’s past performance in order to determine for yourself whether its zero-debt position is justified.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.